The Interest Rate Effect on Private Saving: Alternative Perspectives

Joshua Aizenman, Yin-Wong Cheung and Hiro Ito

Journal of International Commerce, Economics and Policy (JICEP), 2019, vol. 10, issue 01, 1-37

Abstract: Lowering the policy interest rate could stimulate consumption and investment while discouraging people from saving. However, such a move may also prompt people to save more to compensate for the low rate of return. Using the data of 135 countries from 1995 to 2014, we show that a low interest rate environment can yield different effects on private saving under different economic environments. The real interest rate affects private saving negatively if output volatility, old-age dependency, or financial development is above a certain threshold. Depending on a country’s specific economic circumstances, these effects are significant for the economy — a four-percentage point decline in the real interest rate, which is approximately the same as one standard deviation for China, would lead to a 1.52 percentage point increase in the Chinese private saving rate. Further, when the real interest rate is below 1.1%, greater output volatility would lead to higher private saving in developing countries.

Keywords: Income effect of interest rate; substitution effect of interest rate; output volatility; old-age dependency; financial development (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (8)

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Working Paper: The Interest Rate Effect on Private Saving: Alternative Perspectives (2019)
Working Paper: The Interest Rate Effect on Private Saving: Alternative Perspectives (2016)
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DOI: 10.1142/S1793993319500029

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